Decision Support

5 Strategies for Rebuilding Profitability in Retail

Matt Field

April 12, 2022

The retail industry was hit hard over the last two years. 2020 saw a record-breaking 12,200 brick-and-mortar stores shut their doors in the US alone, with many big and beloved brands filing for bankruptcy. The list includes Pier 1 Imports, Toys R Us, and Neiman Marcus, just to name a few. 

Yet, as sudden as these devastating losses may have seemed, the reality is that COVID-19 didn’t cause the precipitous decline of traditional retail  — it merely accelerated it. Fashion growth rates were projected to slow before this global pandemic ever became our new normal. Worldwide eCommerce sales were increasing steadily year-over-year, spurred on by the rise of direct-to-consumer (DTC) brands. And markdowns cost retailers a staggering $300 billion in 2018 alone.

The pandemic exposed issues that have been bubbling beneath the surface for years, and in the wake of the catastrophe, brands continue to face many challenges like demand volatility, supply chain disruptions, and rising costs. 2022 marks a pivotal moment in retail history, one where brands can either focus on rebuilding profitability in the midst of this new normal or continue to feel the squeeze of shrinking profit margins.

The road to recovery is built on consumer obsession, sustainability, and digital transformation. It’s been paved by thriving brands like Amazon, Rothy’s, and Chewy. And it calls for all retail brands to embrace the following five key strategies. 

Become Consumer Obsessed

Not so long ago, consumers were a captive audience whose demand was mostly dictated by the goods major retailers chose to supply to them in stores. Today’s consumers, however, have instant access to global fashion trends and near-unlimited options to choose from thanks to the internet. The rate of change makes it impossible to intuit demand, and the pandemic proved that historical data isn’t always relevant — yet most brands continue to make assortment decisions based largely on stakeholder opinions and past sales performance.

The result? Consumers are satisfied with products for just half as long as they were 15 years ago, and retail overproduction has reached a dismal 40% per season. These numbers put the need for brands to take a more data-driven and consumer-obsessed approach to product creation in stark relief. In fact, approximately 80% of product and merchant professionals believe their brands need to improve consumer knowledge to stay competitive. If brands created more products based on consumer demand data, they would see an immediate improvement in their bottom line and the volume of overproduction in the industry would decrease dramatically and.

Tapping into data sources like industry reports, social networks, and loyalty programs will help brands gain a deeper understanding of their current and aspirational consumers’ lifestyles, interests, and behaviors. But the most valuable insights for crafting assortments that deliver on audience demands come directly from consumers themselves. Soliciting real-time, specific product feedback allows teams to objectively anticipate buyers’ preferences and purchase intent so they can focus on creating products consumers are sure to love — and buy at full price.

Make Product Creation More Efficient

The traditional product creation and line review process is extremely analog, subjective, and time-consuming. Several times over the course of 12-18 months, brands fly stakeholders from around the world to meet in person and discuss milestone decisions. Teams spend days flipping through 300-slide decks, sharing opinions on every item in the assortment, and passing around samples that usually don’t make the cut. Due to tight deadlines and lack of objective alignment, important decisions are often hastily made by the loudest voice in the room.

In today’s on-demand digital world, a 1-2 year lead time for assortments is no longer tenable for brands to capitalize on trends. What’s more, the majority of merchandisers (53%) agree that these milestone meetings are too frequent and/or long, yet they also cite “lack of time” as the #1 inhibitor of effective collaboration. Add travel expenses and money spent on unnecessary sampling to these operational and opportunity costs, and it becomes clear that traditional product creation processes are a major drain on retail profitability (and the environment). 

Improving efficiencies starts with capturing both qualitative and quantitative stakeholder input prior to milestone meetings. This, and other assortment details, should be centralized in a single source of truth where teams can get context, review consumer feedback, and identify key points of contention for focused, objective discussion. Adopting cloud-based collaboration tools, like video conferencing and an assortment management workspace, allows teams to collaborate virtually and in real-time, minimizing travel costs and enabling faster, more iterative decision-making. Finally, 3D CAD technology helps stakeholders visualize products and narrow down the number of samples they need to produce to only those they feel most confident about.

Reduce Supply Chain Costs

The supply chain has always been an area of vulnerability for retailers, with every unexpected delay or shortage cutting deeper into profit margins. Unfortunately, the global pandemic only exacerbated issues like demand volatility, logistical jams, and factory closures, giving way to unprecedented sourcing and procurement challenges that don’t appear to be getting better any time soon. Consumers now receive an out-of-stock message on one out of every 59 product web pages — that’s a 235% increase compared to pre-COVID.

To help resolve these inefficiencies, many brands are exploring alternative sourcing-country mixes that improve manufacturing and logistics speed and flexibility. More than 70% of Chief Purchasing Officers plan to increase their nearshoring share, while 24% aim to increase reshoring, according to a recent McKinsey survey. Using a domestic supplier or manufacturing goods closer to where they’re sold accelerates speed to market, lowers customs and duty charges, and ultimately gives brands greater control over their supply chain. 

Many brands now view a multi-country sourcing strategy as a long overdue and vital solution to establishing a more agile inventory pipeline, one that eliminates the risk of “putting all their eggs in one basket.” Shifting toward shorter, consumer-led assortment development cycles also moves brands closer to a demand-driven supply model that helps mitigate many common supply chain disruptions and shrink losses caused by stockouts and markdowns. 

Embrace Digital Commerce

From social distancing to mask mandates, the pandemic changed the in-store shopping experience for consumers everywhere. People were encouraged to stay home unless absolutely necessary, and non-essential businesses were closed for weeks at a time. Savvy retailers polished their websites and began offering delivery and curbside pick-up, while more consumers started shopping online than ever before. US eCommerce sales reached an all-time high of $762 billion, while annual social commerce sales surged nearly 40%.

However, digital commerce is hardly a pandemic-fueled phenomenon — both eCommerce and social commerce were growing steadily prior to 2020. While US brick-and-mortar retail sales are expected to remain essentially flat over the next year, eCommerce is projected to grow more than 16% in 2022, surpassing the $1 trillion mark for the first time. What’s more, global social commerce is anticipated to grow 3x faster than eCommerce by 2025, with Millennials and Gen Z accounting for the majority of spend. 

It’s evident these channels are reshaping the future of retail, and brands that refuse to get on board are destined to go the way of the dodo bird as digitally native generations continue to come of age. Growing popularity aside, digital commerce offers brands an opportunity to increase profitability by significantly reducing overhead costs associated with staffing, maintaining, and stocking brick-and-mortar locations. Brands can also reach consumers around the globe outside of regular business hours, target them with personalized product recommendations, and streamline their checkout process to just a few clicks — all of which lowers barriers to purchase and ultimately fuels profitability.

Prioritize Sustainability 

Over the last several years, “environmentally-conscious” retailers have focused their efforts to combat climate change on using sustainable materials. However, recently surfaced photos of the massive landfill in the Atacama Desert in Chile, where unsold jeans, jackets, purses, and more are piling up at the jaw-dropping rate of 39,000 tons per year, are revealing the full extent of the retail industry’s contribution to climate change. And legislators have started to take notice. The NYC Fashion Act holds large global footwear and apparel companies accountable for both their environmental and social impact.

Unfortunately, many retailers still believe that sustainable practices come at the cost of profitability — a misconception that couldn’t be further from the truth. Not only does overproduction harm the planet, but markdowns now represent 40% of total retail sales, drastically reducing margins and negatively impacting brand value. In addition, the pandemic has led more consumers to actively seek out brands that uphold their personal views and values. Capgemini Research Institute found that 64% of consumers say buying sustainable products makes them feel happy when shopping, while 52% feel an “emotional connection” with sustainable brands and products. 

Sustainability must become more than a marketing gimmick or “feel good” culture value for companies. Leading brands have realized that its good business to be good to the planet, and are beginning to treat sustainability as a function of profit and loss (P&L) rather than an environmental, social, and corporate governance (ESG) initiative. In fact, recent research shows that 63% of executives have found that sustainability helps boost revenue, and 77% say that it leads to increased customer loyalty.

The Path to Profitability Starts Here

The global COVID-19 pandemic has caused significant turbulence for the retail industry, but the changes brands are making in response to this disruption have been a long time coming. 2022 is the year for brands to reevaluate “the way things have always been done” and rebuild profitability by embracing consumer obsession, sustainability, and digital transformation. 

Brands must step outside their echo chambers and tune into the voice of the consumer to create products people love. Making product creation more efficient is achievable through virtual, asynchronous collaboration and the latest cloud technologies. Exploring alternative sourcing-country mixes cuts back on rising supply chain costs, while digital commerce offers growing digitally native consumer segments more convenient and instantaneous shopping experiences. Finally, prioritizing sustainability protects margins, brand integrity, and the environment.

Employing these key strategies for success is sure to boost profitability through 2022 and beyond. To learn more about how successful brands like Faherty and Taylor Stitch are trading in traditional merchandising strategies in favor of more data-driven and consumer-obsessed models, visit MakerSights.com.

Matt Field
Co-founder, MakerSights

Related Blog Posts

Optimize Retail Sales with Value-based Pricing

Inflation is driving up the cost of production, which means that companies need to find new ways to cover the increasing material costs while remaining competitive and not pushing away consumers.

Team MakerSights

Read Now

What’s New at MakerSights

Throughout Q1 MakerSights delivered a collection of new features to help brands embrace consumer obsession. Check out the recap here.

Team MakerSights

Read Now

New Line Efficiency by MakerSights Enables Brands to Optimize Assortments and Increase SKU Productivity Based on Consumer Demand Data

Merchandisers Can Now Reach a Wider Breadth of Consumers with Fewer Products, Driving Revenue While Reducing Risk, Cannibalization Across Lines, and Overproduction

Team MakerSights

Read Now

Reach out to schedule a free demo with our team. Fill out the form and we'll be in touch within 24 hours.

Book a demo